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February 22, 2011

U.S. Oil Prices Hit 2½-Year High Over Libya Worries

Output cut during unrest as prices soar

The domestic turmoil in Libya that saw the nation’s crude oil output cut by as much as 100,000 barrels per day has pushed up the price of U.S. crude futures to a 2½-year high on Tuesday.

Reuters reported that the drop in Libya’s output has spooked the market, with the risk that further violence will cut output even further. Worries that other nations in the region might suffer similar circumstances led investors to bid up futures to $94.49, a level not seen since October 2008. While some of that gain was later trimmed, prices remain more than $2 over their Monday levels. In addition, Brent crude for April delivery hit $108.45 a barrel, up $2.71 to its intraday peak. On Monday, Brent crude had hit its own 2½-year high at $108.70.

As Saudi Arabia, which has most of the world’s spare capacity of oil, said it saw no need to pump more to satisfy demand, concerns over other nations’ abilities to meet demand surged while violence wracked Tripoli. Yinxi Yu, a commodities analyst with Barclays Capital, said in the report, “The market is very nervous over news of violence in Libya, and that's driving prices," and added, "The situation threatens to blow out in the next few days, and it looks like the uncertainty in the region is not going to be resolved any time soon.”

Although protests have surged in the region, from Tunisia to Egypt and Bahrain, Libya’s unrest and outages are the first to have an impact on the supply of oil. Worries over the possibility of supply disruption from Saudi Arabia, the only nation in the region capable of increasing its output quickly and substantially, have been exacerbated by that nation’s declaration that it sees no need to do so during the current turmoil.

Deputy Saudi Oil Minister Prince Abdulaziz bin Salman Al-Saud said Monday, “We're much more focused on how the market balance is—is it sufficiently supplied? And the answer is ‘yes, abundantly.’ Therefore, does the situation warrant any kind of intervention? I don't think so.”

While Saudi protests have not been major, the unrest in neighboring Bahrain has the potential to spread and disrupt production. Yu said of the situation, “There is spare capacity to cover Libya’s production if there is a complete shutdown there, but if the unrest spreads to other parts of the Middle East, even the current capacity might not be enough.”